I have a column in the January 2011 issue of China Economic Review, a special issue devoted to examining China’s new Five Year Plan. My own article focuses on the effort to address China’s regional disparities in income and development. You can access the original version here.

Closing the Gap

Infrastructure investment in China’s interior will only pay off if local officials devise competitive development plans, says Tsinghua’s Patrick Chovanec

Visit one of China’s coastal cities, where much of the country’s trade and investment is concentrated, and you might easily believe you’ve landed in Tokyo, Seoul, or Singapore. Travel to a village in China’s interior and you might just as easily think you’ve stumbled into one of the poorest corners of Africa.

One of the top priorities of the 12th Five-Year Plan will be reducing China’s huge, and often disturbing, wealth gap – a gap that propels at least 200 million migrants every year to fi nd jobs along the more prosperous coast. In 2009, China’s 12 coastal provinces (out of 31) accounted for 65% of the country’s GDP, and had a collective per capita GDP 50% higher than the national average.

The most obvious solution lies in infrastructure. There are thousands of more remote places where new highways, bridges, railroads, and airports are desperately needed to connect both people and products to outside markets.

China has attracted worldwide attention with its ambitious plans to ferry passengers across the country in trains running on ultra-modern high-speed rail lines, freeing up existing capacity to handle other goods. A better, if less glamorous, approach is to develop the country’s intermodal freight network.

While America’s passenger rail services leave something to be desired, its freight rail system is the best in the world. Inland Chinese cities like Chengdu or Lanzhou are really no more remote from global markets than Chicago or Denver; the difference is a robust and efficient logistics network. With container terminals, rail yards, and modern storage facilities in place, more industries would find it plausible to locate in China’s interior, alleviating the need for workers to travel so far from home to find a job.

Rather than moving people more quickly, the country should build a rail system that moves goods and makes people more productive where they already are.

As China grows more interconnected, local officials face another challenge: identifying and capitalizing on their city or region’s unique competitive advantage. All too often, when I travel around China, I hear provincial or municipal leaders recite the same standardized list of “pillar industries” they are trying to foster: automobiles, pharmaceuticals, information technology, real estate, and financial services. They all want to replicate Shanghai’s Pudong New Area in their own backyards.

But just as America only has one Manhattan, China has no need for hundreds of Pudongs. Instead, officials need to think seriously about how their local plans fi t into a broader, highly competitive picture.

The first step is seeing beyond the simple dichotomies of coast and interior, urban and rural.

Lumping the country’s economically advanced areas into one basket, and its underdeveloped areas in another, glosses over crucial distinctions, and offers little in terms of strategy. China is actually composed of at least nine different regions, each with its own character, history, and economic dynamics.

Take the three southwest provinces – Guangxi, Guizhou, and Yunnan – which are poor and desperate for infrastructure. Officials are wisely capitalizing on its natural scenic beauty as a tourist draw and its strategic location as a cross-border trade gateway to Southeast Asia. Less wisely, they are recasting the region’s land- and water-hungry sugar industry into a dubious green energy play in order to grab more central government subsidies.

Or take the three provinces of the northeast: Liaoning, Jilin, and Heilongjiang. Officials there are shrewdly capitalizing on the region’s ties to Japan and Korea to attract foreign investment and serve as an outsourcing center. Less shrewdly, they’ve bought into state-funded schemes to construct vast port and real estate projects on the scale of Pudong, and to repackage bluecollar Shenyang as a “financial capital.”

These two examples illustrate the temptation that local Chinese officials face to adopt cookiecutter solutions, as well as the immense potential that can be realized by those who have the vision to carve out rich and sustainable competitive niches.

Developing China’s interior isn’t a matter of extending or reproducing the success of its coastal regions. It’s about enabling new kinds of success that complement, rather than compete with, what has already been achieved.

BTW, for those who are interested in reading more about the “nine regions” I cited, check out my November 2009 article in The Atlantic, called “The Nine Nations of China,” which I have reposted here. You can access the individual region descriptions by clicking on the links in the population comparison chart.

Patrick – This is a great piece. It illustrates to me that in devising economic policies, the government really needs to be mindful of unintended consequences and make sure the incentive system does not encourage uneconomic use of capital and resources. It also highlights human’s tendency of extrapolating without critial thinking. Based on what I read about China, I am sure there are many more other examples.

My question to you is realistically how successfully the government can reduce the gap between the interior and the costal region? At what speed would be acceptable to those who reside in the interior? Would the major obstacles be the human capital and entrepreneur culture (or the lack of) or the physical infrastructure? Giving the inflation in accelerating in China and across the emerging economy, how much time the government has to make this right before some serious social unrest might break out and impact China’s political stability?

I spent two years in rural Guangxi, it was interesting to hear locals talking about how almost all of the rice had been replaced with sugar cane. At the same time we started hearing rumors about sugar cane being turned into ethanol and the development of Beihai and Qinzhou into Beibuwan SEZ. The idea seemed to be that if they built a big enough port it would boom just like Shenzhen and Guangzhou.http://seeingredinchina.wordpress.com

I found this post informative. I’m interested in energy issues and I’ve read that with surging electricity production by coal has presented China with logistical problems due to the fact that coal reserves lie inland and the demand is mostly on the coast. Obviously, either the coal has to be transported or the electrical transmission network needs to be large enough to transport the power. Of course, the scale of the problem will continue to grow in coming decades.

Nuclear, it is argued, is better suited to serve coastal areas since access to seawater for cooling water is trivial and fuel transportation is not significant.

The US has an efficient rail transport system but I would note that coal constitutes a large fraction of this. The magnitude of the problem of bridging coal reserves and demand centers is quite major for the US, although surely transport of manufactured goods and people is much less than that for China. Still, I imagine a large fraction of China’s freight network is, in fact, devoted to coal transport and I would suggest that development of energy infrastructure is tightly coupled to freight infrastructure.